Risk Control through Dynamic Core-Satellite Portfolios of ETFs: Applications to Absolute Return Funds and Tactical Asset Allocation — January 2010

About EDHEC-Risk Institute

Founded in 1906, EDHEC is one of the foremost French business schools. Accredited by the three main international academic organisations, EQUIS, AACSB and Association of MBAs, EDHEC has for a number of years been pursuing a strategy for international excellence that led it to set up EDHEC-Risk in 2001. With 47 professors, research engineers and research associates, this centre has the largest asset management research team in Europe.

The Choice of Asset Allocation and Risk Management EDHEC-Risk structures all of its research work around asset allocation and risk management. This issue corresponds to a genuine expectation from the market. On the one hand, the prevailing stock market situation in recent years has shown the limitations of diversification alone as a risk management technique and the usefulness of approaches based on dynamic portfolio allocation. On the other, the appearance of new asset classes (hedge funds, private equity, real assets), with risk profiles that are very different from those of the traditional investment universe, constitutes a new opportunity and challenge for the implementation of allocation in an asset management or asset-liability management context. This strategic choice is applied to all of the centre's research programmes, whether they involve proposing new methods of strategic allocation, which integrate the alternative class; taking extreme risks into account in portfolio construction; studying the usefulness of derivatives in implementing asset-liability management approaches; or orienting the concept of dynamic “core-satellite” investment management in the framework of absolute return or target- date funds.

An Applied Research Approach In an attempt to ensure that the research it carries out is truly applicable, EDHEC has implemented a dual validation system for the work of EDHEC-Risk. All research work must be part of a research programme, the relevance and goals of which have been validated from both an academic and a business viewpoint by the centre's advisory board. This board is made up of internationally recognised researchers, the centre's business partners and representatives of major international institutional investors. The management of the research programmes respects a rigorous validation process, which guarantees the scientific quality and the operational usefulness of the programmes.

Six research programmes have been conducted by the centre to date:

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Asset allocation and alternative

diversification

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Style and performance analysis

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Indices and benchmarking

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Operational risks and performance

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Asset allocation and derivative

instruments

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ALM and asset management

These programmes receive the support of a large number of financial companies. The results of the research programmes are disseminated through the three EDHEC-Risk locations in London, Nice and Singapore.

Source EDHEC (2002) and Ibbotson, Kaplan (2000)

In addition, EDHEC-Risk has developed a close partnership with a small number of sponsors within the framework of research chairs. These research chairs correspond to a commitment over three years from the partner on research themes that are agreed in common.